What Is Servitization in Manufacturing?

Facing increased competition, decreased product differentiation and mounting customer expectations, many manufacturers have found that the traditional product-centric business model that they’ve been following is no longer enough to set them apart. This has caused producers of everything from aircraft engines and bullet trains to lighting fixtures and electronics to rethink their strategies and embrace an approach that packages services with their goods.

Truth be told, this so-called “servitization” model has existed in pockets of the industrial sector dating as far back as the 1980s. But thanks to increasing digitization and ever-advancing analytics capabilities, more manufacturers are jumping on the servitization trend to offer value-added services at specific points along the product life cycle, for example, or fully revolutionizing their operations to sell outcomes — say, a certain level of uptime or throughput for a piece of equipment — to customers, rather than just physical goods.

What Is Servitization in Manufacturing?

Servitization is an approach in which manufacturers offer comprehensive solutions to customers that go beyond one-off sales of products to create longer-term and more mutually beneficial relationships. At its most basic level, servitization in manufacturing is the process of evolving from selling tangible products to offering services related to those products, such as maintenance and repair, that expand their use and increase their lifespans.

Harvard Business School marketing professor Theodore Levitt famously said: “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” Years later, Harvard Business School professor and consultant Clayton Christensen took this logic a step further, noting that customers aren’t really looking to buy a product; instead, they have a job that needs to be done.

That approach has played out across industries, from entertainment to enterprise technology, with businesses disrupting entire marketplaces to create as-a-service offerings for customers. In fact, the global everything-as-a-service (XaaS) market is predicted to reach $1.2 trillion by 2030, according to research published by Spherical Insights & Consulting.

Manufacturers are increasingly thinking about how to better meet their customers’ needs in a way that’s more profitable and sustainable for themselves. Companies throughout the sector have begun to shift from just making and selling products to solving their customers’ problems, whether that’s in the form of simple after-sales support and service or full-on product-as-a-service offerings.

Rolls-Royce was one of the very first manufacturers to take this tack. Dating back to 1962, it began offering “power-by-the-hour” contracts for maintaining and managing jet engines. (More on this later.) Decades later, other manufacturers are following suit, packaging their products with value-added services and/or rethinking the product-centric paradigm completely to sell as-a-service or pay-by-use offerings in lieu of a physical product.

Key Takeaways

• Servitization in manufacturing requires businesses to shift their focus from product-centric transactions to delivering recurring services.
• The spectrum of services manufacturers can offer range from repair and maintenance to outcome-based contracts.
• Servitization can deliver a number of benefits for manufacturers, including greater financial stability, increased customer engagement and accelerated product innovation.
• A service-centric approach requires the adoption of new processes, technologies and even business models.

Servitization in Manufacturing Explained

Servitization is a broad category of efforts that manufacturers take to build service-based revenue streams. The idea began to take hold after the 2008 recession, which roiled manufacturing revenue streams. With product sales plummeting, manufacturers began exploring in earnest how the integration of services into their business models could offer them greater risk resilience and sustainable growth.

Today, the concept continues to have legs as customer demands have escalated. Customers want it all — better, faster and cheaper — and servitization offers an avenue for meeting these demands in a way that helps manufacturers, as well.

Manufacturers can think of servitization as a spectrum of approaches. At one end, they might offer any of a range of services wrapped around a physical product — such as product repairs and overhauls, predictive maintenance, training and consulting, financial services or customer support. At the opposite end, they might truly transform their products into services with outcome-based contracts that rely on the output, quality or results a product provides, rather than the value of the physical product itself; or with demand-based pricing, where they can maintain ownership over the actual product and sell results instead.

Successful servitization can be a win-win for manufacturers and customers alike. On the manufacturing side, companies can experience more predictable cash flow and revenue streams, tap into data that leads to better product development, provide proactive or predictive maintenance, forge closer relationships with customers and differentiate themselves from competitors. For customers, the benefits of servitization include decreased capital investment, more reliable products, better support and even customized solutions.

The Servitization Business Model for Manufacturing

Servitization requires manufacturers to shift their focus from increasing product sales to increasing consumption, with a greater emphasis on product or service outcomes. That’s a markedly different approach from the traditional manufacturing business model, in which companies focus entirely on creating and selling products. The goal of servitization is to create mutual value for both manufacturers and their customers beyond a single sales transaction.

Because this is such a fundamental change for manufacturers, it’s rarely accomplished in a single effort but, rather, as degrees of transformation on more of a servitization continuum. In fact, manufacturers may choose to adopt multiple levels of servitization along the way. Some may be satisfied with a lower level of servitization, while others seek to adopt a full product-as-a-service model. Still others may find value somewhere in between.

For example, at the early stages of servitization, a manufacturer may introduce bundled or ancillary services with greater customer appeal, like product repair, maintenance, field service or monitoring. At a more advanced level, manufacturers may begin to promote complex servitization offerings, such as pay-per-use or outcome-based contracts and integrated product solutions. These manufacturers may even go so far as to not sell their products at all but instead retain ownership of them as a means to deliver outcomes or functions to their clients.

Servitization requires manufacturers to support the new approach by not only rethinking the way they do business — operations, finance, revenue models, back-office business processes and technology solutions — but also reshaping their cultures into service-oriented organizations.

Types of Servitization in Manufacturing

Manufacturers can offer a variety of services; the choices will largely depend on the nature of their products, customer needs and their ability to support the type of servitization indicated. These options will range from providing the most basic of support services; graduating to intermediate offerings, like consulting and training or condition monitoring; and extending to more advanced services, enabled by outcome-based contracts or service-level agreements. It’s important for manufacturers to thoroughly evaluate what degree of servitization aligns best with their needs, capabilities and goals. Some of the most common types of servitization in manufacturing follow.

• Maintenance and Repair Services

  This category of servitization generally includes services specifically related to the manufacturer’s product. A manufacturer of commercial washing machines, for example, might offer maintenance and repair services. At a more advanced level, some product manufacturers might be able to offer predictive maintenance services. If those washing machines are embedded with sensors and the manufacturer has invested in advanced diagnostic and decision-control tools, response to or prevention of product issues and failures could be rapid.

• Operational Services

  Some manufacturers are able to offer their customers operational assistance, often based on data collected from their products and services. For example, a train manufacturer that also delivers rail management might use sensor data from trains in service regarding engine temperature, rail vibrations and more to reduce fuel consumption, perform proactive maintenance and improve uptime.

• Consulting and Training

  As a step beyond simply maintaining and servicing products, manufacturers can also offer more advanced services related to how their products are integrated in their customers’ environments and processes, as well as educational offerings to help customers use their products most effectively. This might include actual consulting services, training and development programs and ongoing user support.

• Financial Services

  In some cases, it makes good business sense for manufacturers to offer their customers various financing options or subscription-based pricing models to address any concerns about the initial product investment and ensure a sale. An auto manufacturer, for example, might offer financing in the form of leases or loans to overcome would-be barriers to purchasing and to streamline the sales process. This also gives the automaker access to an additional stream of revenue.

• Outcome-Based Services

  Outcome-based servitization is one of the more advanced forms of servitization, whereby a manufacturer is paid for providing its customers with certain results — for example, the savings or efficiency that its product generates — rather than simply the product itself. These options can take some time for manufacturers to figure out how to do profitably; it is a much different approach to traditional product sales. A recent report from IoT Analytics looked at equipment-as-a-service adoption among original equipment manufacturers, estimating that the market had reached $21.2 billion at the end of 2023, with anticipated market growth of 11% from 2023 until 2028.

Benefits of Servitization in Manufacturing

Servitization offers manufacturing businesses a range of benefits, including increased revenues and profits, stronger customer relationships and loyalty, better and more innovative product development, and greater market share. But transitioning to servitization isn’t easy. Manufacturers must be prepared for the challenges that can accompany this shift and invest in the data, analytics and technology required to make it work.

Manufacturers that adopt a servitization business model have the potential to surpass hypercompetitive markets and commoditized product spaces to exceed demanding customers’ expectations. Additional benefits include:

• Strengthened financial stability and resilience: Selling ongoing services or implementing pay-per-use or outcome-based contracts delivers more stability and resilience than one-off product sales, creating a source of regular, recurring revenue. (This was one of the primary reasons manufacturers embraced servitization during low-demand periods in the first place.) In many cases, servitization contracts guarantee a revenue stream that can offset the cyclical nature of product sales.

• Enhanced revenue and profitability: In addition to greater financial stability and resilience, servitization can deliver actual revenue and profit growth. Customers may be eager to pay more for services and the benefits that accompany them, which can boost manufacturers’ top and bottom lines.

• Superior customer engagement and feedback: Service offerings promote closer interactions than manufacturers would typically have with customers involved in only one-time product sales transactions. Indeed, manufacturers have struggled for years to create the kind of customer engagement that other industries have. In some servitization use cases, ongoing data sharing via smart products provides even more insight in the form of customer usage data and feedback. This creates a continuous learning loop from service to delivery, which engenders a greater customer experience and (as we’ll cover later on) more intelligence to drive the development of future products and services.

• Strengthened customer loyalty and retention: More frequent interactions, in addition to more robust product support and the reliability that can result from servitization, tend to foster stronger relationships between customers and manufacturers. This can increase customer loyalty and retention. And the more value services provide to customers, the stronger these bonds become, which can also expand customer lifetime value.

• Accelerated product innovation and development: The ongoing customer insights that result from manufacturer servitization can fuel greater product innovation and more customer-centric product (and service) development. Product usage data and customer feedback can reduce the cost and effort typically involved in ongoing innovation and product development by helping manufacturers better understand how customers are using their products and what they’d like to see.

• Enhanced product reliability and operational uptime: Because many types of servitization involve various forms of proactive or predictive maintenance and monitoring of key performance indicators, manufacturers are often able to offer customers better product reliability and reduced downtime. This is a boon for both customers and manufacturers, as solving problems before they occur is inherently less costly and time consuming than dealing with breakdowns. Of course, this fosters greater customer satisfaction and loyalty, as well.

• Extended product lifespan and durability: Reliability and uptime aren’t the only positive effects on manufacturing products when servitization is involved. Servitization often leads to increases in product durability and usable lifespan, due to the manufacturer’s ongoing involvement in managing and servicing the product regularly over time.

• Customized product offerings tailored to specific customer requirements: In some cases, manufacturers can offer their customers solutions and services tailored to their requirements, presuming manufacturers have the necessary infrastructure, processes and skills in place to provide such customization.

Why Implement Servitization in Manufacturing?

While some servitization pioneers embraced this approach long before there was broad demand in the marketplace, today’s customers are looking to manufacturers to provide more services, ensure the reliability of their products over time and demonstrate their ability to deliver the outcomes customers anticipate.

In addition, manufacturers today are operating in a tough marketplace, marked by economic uncertainty, restriction on customers’ capital purchasing power and declining revenue from new product sales. Services can provide significant stability in the face of these challenges. And, as technology has advanced, manufacturers have new opportunities to supply a range of digital services enabled by smart products in combination with advanced analytics and cloud computing. According to Gartner, 38% of manufacturing survey respondents already offer digital services to customers. What’s more, these companies expect total revenue from digital services to grow from 10.4% today to 29% by 2030.

Challenges in Implementing Servitization in Manufacturing

The benefits and marketplace trends highlighted above are driving a growing number of manufacturers to consider the servitization business model. However, no definitive playbook has been written for how to integrate services into the manufacturing portfolio. As a result, the transition can be difficult, particularly for a long-standing industry that historically has been slow to embrace technology-enabled change.

At a high level, servitization requires rethinking many of the ways that manufacturers have operated for years. Some of the specific challenges in implementing servitization in manufacturing include:

• Strategic alignment and customer trust: For servitization to take hold, it must be embraced by the manufacturing organization — from the top on down — as well as by the company’s customer base. It cannot just be layered on top of a traditional manufacturing business model, either; such an approach won’t yield intended benefits and could cause more harm than good. A solid servitization strategy must align with the overall goals of the business. It also requires consensus among leaders about what the business model should look like, and those leaders must have the ability to communicate and sell that vision to the larger organization.

  On the customer side, convincing existing clients of the value of a new approach, which may come with different contracts, payment models and requirements, can be challenging. A servitization model that customers don’t buy into could have a negative impact on sales and the brand. Thus, it’s essential to involve customers in the development of servitization options to ensure that they believe in the approach and trust the manufacturer to deliver.

• Investment vs. return: Revenue and profit growth, increased customer retention and loyalty, greater financial stability: These are among the potential financial benefits of servitization. But such a fundamental change requires significant investment up front and, therefore, demands high utilization of services to deliver a return on investment. Servitization also requires considerable experimentation to get right. Devising a solid business case and clear path to ROI can prove difficult, particularly since approaches to servitization are highly dependent on the manufacturer’s products, customer base and goals.

• Profitability concerns: Theoretically, manufacturers may be able to make much higher margins on services than the typically thin margins that come with pure product sales, but there are also significant costs associated with delivering services, such as new service infrastructure, technology, training and customer support. In some cases, offering services can be more labor-intensive than producing manufactured goods. Advanced data, analytics and automation can be helpful in maintaining servitization profit margins.

• Operational and cultural shifts: Transforming a traditional manufacturing business model into a servitization business model requires significant changes to operations and culture. Many business processes, including sales, marketing finance, logistics, production, customer support and field service management, will need to be reconstructed in order to make the servitization approach operational. In addition, manufacturers will need to establish a service-focused culture and mindset, which can also be challenging for companies in this traditionally production- and product-focused sector. Because servitization also requires significant technology inclusion, technology change management must be implemented thoughtfully, as well.

• Customer-needs identification: Servitization works only when it is built around customers’ needs. Developing a solid customer-focused strategy requires in-depth exploration into buyers’ unmet needs after they purchase a product. Manufacturers must analyze and define those needs in relation to different customer segments and determine how services, enabled by available data, could meet them. Feasibility analysis, to determine whether proposed services would be practical, is also essential.

Technological Enablers for Servitization in Manufacturing

When it comes to servitization, it’s clear that manufacturing organizations will need to embrace a new way of thinking if they are to be successful. A key success factor is the digital maturity of the business and its investment into the kinds of technological solutions that can enable a servitization business model. For example, if a company wants to offer outcome-based contracts, rather than straightforward product sales, it must evolve well beyond basic invoicing. It will need tools to monitor consumption, ensure tracking accuracy and be prepared to bill for what is used. Often, multiple digital solutions and processes will need to be integrated to make servitization possible.

Some of the most common technologies manufacturers must invest in to enable servitization include:

• Information and Communications Technology (ICT)

  A range of enterprise systems and infrastructure form the backbone of any servitization strategy. Digital services play a large role in these efforts, so it’s essential to invest in a foundation of customer-centric ICT technologies that integrate well with one another and with some of the tools outlined below. Many manufacturers already are far along on their digital transformation journeys, which will serve them well in their servitization efforts.

• Data Analytics

  High-quality and accessible data that exist in business systems and are generated by connected products is at the heart of any servitization business model. Good data governance and access are essential, as are advanced analytics technologies that can equip manufacturers with what they need to learn more about customers, track product usage, make productivity and product improvements, and perform product support and maintenance. Predictive analytics, for example, can enable manufacturers to address potential product problems before they impact the customer.

• Internet of Things (IoT) and Edge Computing

  One of the linchpins of many manufacturing companies’ servitization approach is the use of smart products, enabled by Internet of Things (IoT) technology. This class of connected products, found in aircraft engines, trucks, cellphones, thermostats and more, has sensors that generate data on product usage, viability and other performance indicators that can be analyzed to provide advanced services to customers; elevator maker KONE has a connected elevator that lets the manufacturer know when it’s time to perform maintenance, for example. Edge computing is a technology that enables manufacturers to analyze the data produced by IoT-enabled products where they are located, rather than transferring the data to servers housed elsewhere, decreasing lag time. Together, these two technologies can streamline the delivery of digital services to manufacturing customers, increasing efficiency, reducing costs and improving the overall customer experience.

• Blockchain and the Cloud

  The volumes of data that must be processed and shared at certain levels of servitization require significant computing to work. Therefore, the adoption of cloud infrastructure and systems becomes critical to the consistent monitoring and leveraging of analytics-produced insights.

  In addition, some types of servitization — like pay-per-use or outcome-based contracts — depend on both the manufacturer and customer being able to trust the data and systems monitoring usage and outcomes. One option that some manufacturers embrace is blockchain technology, which lets usage and other data be updated and stored in a secure, irrefutable way. The distributed ledger technology can be used to approve orders, validate warranties, and collect and report other key servitization data.

• Localized Manufacturing (MaaS)

  Localized manufacturing — also known as manufacturing-as-a-service, or MaaS — includes such capabilities as 3D printing and computer numerical control, or CNC, machining that can be offered to companies on an as-needed basis, often proximal to their end customers. Manufacturers that invest in this kind of infrastructure can, in turn, offer production capabilities to other companies on a pay-per-use or subscription basis — yet another way manufacturers can offer services to clients. Many companies find this flexibility valuable, as they deal with changing production requirements or shifting customer demands. It gives them scalability without the need for heavy up-front capital investment, access to expertise and, often, reduced lead times. What’s more, they can use these advanced manufacturing technologies and processes to personalize or customize products for customers.

What are the Steps of Servitization in Manufacturing?

Successful servitization will look different for different manufacturers. It’s important to take the time to create and implement a strategy that will be welcomed by customers, will align with the overall business strategy and can be feasibly and profitably put into operation by the manufacturer. The most important steps a manufacturer can take to develop and launch a servitization business model are:

1. Identify customer needs: Determine what customer problems servitization could solve (e.g., maintenance and repair, training, specific business outcomes).
2. Define the service offering: Once customers’ needs have been identified, the manufacturer can begin to home in on services that might meet those needs.
3. Assess feasibility: Just because a company should offer certain services doesn’t mean it’s equipped to do so. Factors to consider include technology requirements, resources and skills needed, and any impact on manufacturing processes, product design, supply chain management or overall profitability.
4. Build the service infrastructure: Servitization requires a solid foundation of technology systems, trained staff, business processes and more.
5. Test the service: Manufacturers should test services the same way they test products, providing access to a select group of customers to try the service, provide their feedback and inform improvements.
6. Launch the service: Once a fully tested service is in place, it’s time to market, sell and support the offering.
7. Evaluate and refine: Servitization is a process, so manufacturers should steadily evaluate the offering based on feedback and performance data and refine it as needed to meet shifting customer demands or market conditions. There may also be opportunities to expand the servitization portfolio.

Examples of Servitization in Manufacturing

Plenty of manufacturers in different industries have implemented servitization business models to some degree. Some of the best known, like Xerox and Rolls-Royce, have had successful servitization strategies in place for years, while others have adopted servitization more recently. These examples can help other manufacturers consider whether servitization might make sense for their own organizations.

• Rolls-Royce: The luxury automaker was a servitization pioneer within its aerospace business. Instead of simply selling airplane engines to its customers, it introduced a concept called “power-by-the-hour pricing,” whereby customers paid the manufacturer based on usage (i.e., the number of hours the engine is in flight). Essentially, customers were renting the engines, rather than purchasing them. In 1997, the company launched its TotalCare service to offer ongoing services, like repairs and upgrades, by leveraging engine data and analytics to perform predictive maintenance. This arrangement works out well for both the manufacturer and its customers, which benefit equally from cost savings, lower capital investment, decreased downtime and longer-lasting engines.

• ABB: ABB, the robot and industrial automation manufacturer,offers a range of services to its customers, from remote monitoring and maintenance to digital services. These services are supported by data analytics and artificial intelligence to improve product performance.

• Caterpillar: The heavy-machinery maker entered the servitization space in 2010 with new digital solutions and aftermarket care. One of its core servitization innovations is its patented CatLink telematics platform. With CatLink, Caterpillar can remotely track and monitor equipment at the customers’ sites and provide them with insight on component performance, as well as advice on how to extend the lifespan of the product.

• Alstom: This French high-speed-train maker offers customers itsTrainLife Services (TLS) package, which includes condition-based maintenance, technical and management support, and performance enhancements. The way the contract is laid out protects customers from delays caused by train failures: Alstrom incurs financial penalties if the trains fail during crucial times.

• Philips: This electronics, lighting and medical technology company offers a pay-per-lux servitization option. Instead of buying lighting systems or fixtures, clients purchase lighting as a service, with Phillips performing all installation, maintenance, repairs and replacements.

• Xerox: The one-time copier manufacturer dove headfirst into servitization as part of its business model transformation to a document management and business process service provider. The approach — nixing one-time product purchases for long-term service contracts focusing on outcomes, such as improving document control and reducing paper waste — continues to give Xerox a consistent stream of revenue and also fosters closer relationships with its customers.

Implement and Succeed in Servitization With NetSuite

Many manufacturers recognize the value of integrated, cloud-based enterprise resource planning (ERP) software to their product-focused businesses. NetSuite ERP ties together accounting, customer relationship management (CRM), human resource management, supply chain management, inventory management, order management and more in a centralized database so that decision-makers are all working with the same information. But the software also offers capabilities specifically designed for service management to support such offerings as field service management and consulting. Manufacturers evolving to a servitization business model can take advantage of a suite of customizable features that streamline their servitization business processes, with the additional reassurance that all systems and data are fully integrated.

Servitization in manufacturing is not just another buzzword; it is an innovation that holds the promise of financial stability, increased revenue, improved customer relationships and innovation. It’s a transformative strategy that’s been successfully embraced by industry titans and lesser-known manufacturers alike. With the right investments in understanding customer needs, assessing and building internal capabilities, business process re-engineering and technology systems and infrastructure, servitization can provide greater stability and growth for manufacturers. What’s more, this is not a one-and-done effort; manufacturers can expand and evolve their servitization offerings over time to create new value for themselves and their customers.

Servitization in Manufacturing FAQs

What is the meaning of servitization?

Servitization refers to the delivery of a service related to a product versus simply selling a product outright, in order to create and grow predictable, ongoing revenue streams. Examples of servitization abound in many industries. Uber and Lyft are an example of the servitization of vehicles, while streaming services, like Netflix and Spotify, offer entertainment as a service. In manufacturing, servitization describes a strategy that provides repeatable and profitable value-added services to customers, beyond one-off sales of a specific product. These services range from maintenance and support to consulting and digital insight.

What is manufacturing servitization?

Manufacturers that adopt a servitization business model shift their focus from straight product sales to the delivery of services related to or in lieu of sales of a physical product. These services might include straightforward ancillary services, such as product installation, maintenance and repair; services that help customers make better use of their products, like training and consulting; or a completely new contracting model whereby manufacturers deliver specific outcomes or capabilities via product usage, rather than selling a customer its product. This approach enables manufacturers to expand and deepen their relationships with customers and create a more sustainable stream of revenue to offset or replace the cyclical or unpredictable nature of many product sales cycles.

What is an example of servitization of products?

There is a wide array of examples of servitization of products. Automaker Renault, for example, launched a subscription-only service for some of its vehicles as an alternative to traditional car purchases or leases. Many decades ago, Rolls-Royce began offering its aerospace customers a power-by-the-hour option to pay for the service of its jet engines, based on flight hours, rather than having to purchase the products outright. Xerox is another company that once sold products only but now focuses on the services it can provide with its products, like document management.

What is the impact of servitization?

Servitization, which represents a shift away from a product-centric approach to sales to either a service-forward model or a service-plus-product approach, has had a number of effects on both manufacturers and customers. On the manufacturing side, servitization can provide more financial stability, increased profitability and revenue, greater customer engagement and loyalty, and increased innovation. For customers, servitization can result in decreased capital investment, more reliable and durable products, and better support and service.

What are the different types of servitization?

Some of the most common types of servitization are maintenance and repair services, which may include field service support or predictive maintenance. Some manufacturers may offer consulting and training services to help customers rethink their own operations and product usage for greater business impact. Financial services, like integrated financing options or subscription models, are another type of servitization. Advanced levels of manufacturing servitization include outcome-based services, where manufacturers guarantee (or get paid for) the results their products produce for their customers, rather than highlight the products themselves.